‘Vigilance’ Returns to ECB Discourse, But Now May Be Meaningless

A European Central Bank Executive Board member dropped what was once a key word into a weekend interview, though the word lacks the punch that it did in an earlier era.

Benoit Coeure, a Frenchman on the six-member Executive Board, told a Slovenian newspaper over the weekend that though the ECB thinks inflation in the euro zone will gradually increase toward the target of just below 2%, conditions are closer to the place “where inflation expectations could be altered and create downside risks to price stability.”

He then said the ECB is “very vigilant regarding risks to our baseline scenario, which envisages inflation slowly going back to 2% over the medium term.”

The word “vigilant” triggers alarm bells in every experienced ECB watcher’s head. Back when Jean-Claude Trichet was ECB President from 2003 to 2011, the phrase “strong vigilance” was Mr. Trichet’s code word that the ECB would hike interest rates soon.

One shouldn’t, however, take the parallel too far. Code words are a bit easier to use when a central bank is tightening, particularly if inflation isn’t getting too far out of hand. But when the rails are coming off the economy, central banks typically don’t wait to act. And the ECB is in easing mode these days.

In addition, Mr. Trichet was the ECB’s boss and was speaking in the ECB’s official policy statement. Mr. Coeure is a member of the Executive Board.

Another difference is that, with the ECB’s explicit forward guidance, it is less important for officials to use subtle code words. With Mr. Draghi saying since July 2013 that the ECB will keep rates at current or lower levels for an “extended period of time”, the market already knows the direction rates will go.

Analysts say that Mr. Coeure’s use of the word doesn’t necessarily mean there will be a rate cut in March.

“He seems to see a very big chance of action in March,” wrote Berenberg economist Christian Schulz. This doesn’t, however, mean there will be one, he added. “There is clearly a big chance of action at the March meeting, but with the recovery on track, I would still see the probability of action below that of no action.”

Chris Scicluna of Daiwa Capital Markets said that Mr. Coeure “was emphasizing that the ECB is ready to move if the data call for that to happen.”

Mr. Coeure himself told a European Parliament committee last week that “if we see any downside risk to medium-term price stability, then we would have to act.”

The ECB decided earlier this month that it would leave policy unchanged, despite headline inflation in January that matched the level seen in October, which prompted the ECB to cut its main policy rate in November. ECB President Mario Draghi said at its February press conference the central bank needed more information and experts are eyeing not only the February inflation data, but also forecasts that the ECB will unveil in March that go out to 2016.

On Friday, stronger than expected GDP figures led some experts to think the ECB would hold off on more action.

A separate survey of forecasters that the ECB released last week showed inflation due to rise to 1.7% in 2016, higher than January’s 0.7%, but under the ECB’s medium-term goal of just below 2%. The ECB is due to make its next policy announcement on March 6.

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